Deltic Timber (DEL) 10-Q 2007 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-12147

DELTIC TIMBER CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	71-0795870
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

210 East Elm Street, P. O. Box 7200, El Dorado, Arkansas	71731-7200
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (870) 881-9400

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    Yes  ¨    No  x.

Number of shares of Common Stock, $.01 Par Value, outstanding at June 30, 2007, was 12,487,204.

TABLE OF CONTENTS—SECOND QUARTER 2007 FORM 10-Q REPORT

		Page Number
	PART I - Financial Information
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31
	PART II - Other Information
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults Upon Senior Securities	32
Item 4.	Submission of Matters to a Vote of Security Holders	33
Item 5.	Other Information	33
Item 6.	Exhibits	33
Signatures		34

2

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Balance Sheets

(Thousands of dollars)

	(Unaudited)
	June 30, 2007			December 31, 2006
Assets
Current assets
Cash and cash equivalents	$	20,585		11,359
Trade accounts receivable		6,560		4,202
Allowance for doubtful accounts		(45	)	(55	)
Other receivables		210		772
Inventories		5,343		5,124
Prepaid expenses and other current assets		2,924		2,397
Total current assets		35,577		23,799
Investment in real estate held for development and sale		43,649		44,255
Investment in Del-Tin Fiber		5,447		5,250
Other investments and noncurrent receivables		1,603		1,767
Timber and timberlands—net		207,581		207,637
Property, plant, and equipment—net		39,472		40,925
Deferred charges and other assets		708		633
Total assets	$	334,037		324,266
Liabilities and Stockholders’ Equity
Current liabilities
Trade accounts payable	$	3,553		3,882
Accrued taxes other than income taxes		2,421		1,693
Income taxes payable		2,057		—
Deferred revenues and other accrued liabilities		7,735		5,514
Total current liabilities		15,766		11,089
Long-term debt		70,000		70,000
Deferred tax liabilities—net		4,728		4,178
Guarantee of indebtedness of Del-Tin Fiber		1,553		1,898
Other noncurrent liabilities		24,858		29,620
Stockholders’ equity
Cumulative preferred stock—$.01 par, authorized 20,000,000 shares, none issued		—		—
Common stock—$.01 par, authorized 50,000,000 shares, 12,813,879 shares issued		128		128
Capital in excess of par value		75,364		73,999
Retained earnings		154,308		147,406
Treasury stock		(7,548	)	(8,932	)
Accumulated other comprehensive income		(5,120	)	(5,120	)
Total stockholders’ equity		217,132		207,481
Total liabilities and stockholders’ equity	$	334,037		324,266

See accompanying notes to consolidated financial statements.

3

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

(Thousands of dollars, except per share amounts)

	Three Months Ended June 30,					Six Months Ended June 30,
	2007			2006		2007		2006
Net sales	$	37,905		41,410		78,282		82,656
Costs and expenses
Cost of sales		25,835		28,990		46,763		55,418
Depreciation, amortization, and cost of fee timber harvested		3,195		3,317		7,254		7,055
General and administrative expenses		4,560		4,098		8,267		7,917
Total costs and expenses		33,590		36,405		62,284		70,390
Operating income		4,315		5,005		15,998		12,266
Equity in Del-Tin Fiber		724		808		972		1,171
Interest income		236		107		389		141
Interest and other debt expense		(1,253	)	(1,345	)	(2,593	)	(2,737	)
Interest capitalized		165		285		305		531
Other income		78		95		205		147
Income before income taxes		4,265		4,955		15,276		11,519
Income taxes		(1,727	)	(1,971	)	(6,089	)	(4,567	)
Net income	$	2,538		2,984		9,187		6,952
Earnings per common share
Basic	$	.20		.24		.74		.56
Assuming dilution	$	.20		.24		.72		.55
Dividends per common share
Paid	$	.0750		.0750		.1500		.1500
Declared	$	.1500		.0750		.2250		.1500
Average common shares outstanding (thousands)		12,480		12,401		12,472		12,384

See accompanying notes to consolidated financial statements.

4

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

(Thousands of dollars)

	Six Months Ended June 30,
	2007			2006
Operating activities
Net income	$	9,187		6,952
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and cost of fee timber harvested		7,254		7,055
Deferred income taxes		2,136		(1,957	)
Real estate costs recovered upon sale		3,654		4,385
Timberland costs recovered upon sale		24		62
Equity in Del-Tin Fiber		(972	)	(1,171	)
Stock-based compensation expense		1,448		595
Net increase in provisions for pension and other postretirement benefits		146		335
Net increase/(decrease) in deferred compensation for stock-based liabilities		(400	)	324
Decrease in operating working capital other than cash and cash equivalents		70		439
Other—net		(4,499	)	2,713
Net cash provided by operating activities		18,048		19,732
Investing activities
Capital expenditures requiring cash		(9,319	)	(12,018	)
Net change in purchased stumpage inventory		(314	)	(1,278	)
Advances to Del-Tin Fiber		(1,230	)	(1,662	)
Distributions from Del-Tin Fiber		1,660		1,700
Net change in funds held by trustee		111		—
Other—net		918		1,386
Net cash required by investing activities		(8,174	)	(11,872	)
Financing activities
Repayments of notes payable and long-term debt		—		(4,516	)
Common stock dividends paid		(1,872	)	(1,859	)
Proceeds from stock option exercises		914		1,880
Tax effect of stock options exercised		310		496
Net cash required by financing activities		(648	)	(3,999	)
Net increase in cash and cash equivalents		9,226		3,861
Cash and cash equivalents at January 1		11,359		1,637
Cash and cash equivalents at June 30	$	20,585		5,498

See accompanying notes to consolidated financial statements.

5

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(Unaudited)

(Thousands of dollars)

	Six Months Ended June 30,
	2007			2006
Cumulative preferred stock – $.01 par, authorized 20,000,000 shares, none issued	$	—		—
Common stock – $.01 par, authorized 50,000,000 shares, 12,813,879 shares issued at end of period in 2007 and 2006		128		128
Capital in excess of par value
Balance at beginning of year		73,999		73,431
Exercise of stock options		130		315
Tax benefits on stock options		387		696
Amortization to expense		1,448		595
Transition to SFAS No. 123 (R)		—		(1,553	)
Restricted stock awards		(681	)	(528	)
Restricted stock forfeitures		81		127
Balance at end of period		75,364		73,083
Retained earnings
Balance at beginning of year		147,406		138,333
Net income		9,187		6,952
Common stock dividends		(2,808	)	(1,859	)
Transition to FIN 48		523		—
Balance at end of period		154,308		143,426
Unamortized restricted stock awards
Balance at beginning of year		—		(1,879	)
Transition to SFAS No. 123 (R)		—		1,879
Balance at end of period		—		—
Treasury stock
Balance at beginning of year – 388,682 and 499,372 shares, respectively		(8,932	)	(11,367	)
Shares purchased – no shares in 2007 and 7 in 2006		—		—
Forfeited restricted stock – 1,660 shares in 2007 and 2,324 in 2006		(81	)	(127	)
Shares issued for incentive plans – 63,667 and 94,089 shares, respectively		1,465		2,141
Balance at end of period – 326,675 and 407,614 shares, respectively		(7,548	)	(9,353	)
Accumulated other comprehensive income		(5,120	)	(402	)
Total stockholders’ equity	$	217,132		206,882

See accompanying notes to consolidated financial statements.

6

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 – Accounting Policies

Basis of Presentation

The consolidated financial statements have been prepared by Deltic Timber Corporation (the “Company” or “Deltic”). Certain information and accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. Although management of the Company believes the disclosures contained herein are adequate to make the information presented not misleading, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2006. Preparation of consolidated financial statements requires management to make estimates and assumptions. These estimates and assumptions affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Management believes the accompanying consolidated financial statements contain all adjustments, including normal recurring accruals and adjustments which, in the opinion of management, are necessary to present fairly its financial position as of June 30, 2007, and the results of its operations and cash flows for the three months and six months ended June 30, 2007 and 2006. These consolidated financial statements are not necessarily indicative of results to be expected for the full year.

Recently Issued Accounting Pronouncements

In June 2006, the FASB issued Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition measurement of a tax position taken or expected to be taken in a tax return. The effective date of FIN 48 is generally as of the start of the first fiscal year beginning after December 15, 2006. The Company adopted FIN 48 effective January 1, 2007. The Company’s policy is to recognize potential interest accrued related to unrecognized tax benefits in interest expense and potential penalties are recognized in other expense in the consolidated statement of income. (For additional information regarding FIN 48, see Note 7 – Income Taxes.)

In June 2006, the Emerging Issues Task Force of FASB reached a consensus on Issue No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement. Issue No. 06-3 was effective for the Company on January 1, 2007, and did not have an effect on the Company’s consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 provides guidance for using fair value to measure assets and liabilities and requires additional disclosure about the use of fair value measures, the information used to measure fair value, and the effect fair value measurements have on earnings. The primary areas in which the Company utilizes fair value measures are valuing pension plan assets and liabilities and evaluating long-term assets for potential impairment. SFAS 157 does not require any new fair value measurements. SFAS 157 is effective for the Company beginning January 1, 2008. The adoption of SFAS 157 is not expected to have a material impact on the Company’s financial statements.

7

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 – Accounting Policies (cont.)

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of SFAS No. 115. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments. SFAS 159 is effective for the Company beginning January 1, 2008. The Company does not expect the adoption of SFAS 159 to have a material effect on the consolidated financial statements.

Note 2 – Inventories

Inventories at the balance sheet dates consisted of the following:

(Thousands of dollars)	June 30, 2007		December 31, 2006
Logs	$	648	1,017
Lumber		4,310	3,588
Materials and supplies		385	519
	$	5,343	5,124

Note 3 – Investment in Del-Tin Fiber

The Company owns 50 percent of the membership of Del-Tin Fiber, L.L.C. (“Del-Tin”), which completed construction and commenced production operations of a medium density fiberboard (“MDF”) plant near El Dorado, Arkansas, during 1998. The Company’s membership in Del-Tin Fiber is discussed in more detail in Note 3 – Investment in Del-Tin Fiber, in the Company’s 2006 annual report on Form 10-K.

On August 26, 2004, the Company executed a guarantee agreement in connection with the refinancing of the debt of Del-Tin Fiber. Under Deltic’s guarantee agreement, the Company unconditionally guarantees the payment of 50 percent ($21,250,000 at June 30, 2007) of Del-Tin’s obligations under its credit agreement. The Company estimated the fair value of its guarantee of Del-Tin Fiber’s credit agreement to be $3,450,000. The Company is reducing this liability systematically over the life of the credit agreement, as the Company is released from risk under the guarantee. At June 30, 2007, the Company’s unamortized balance related to the value of the guarantee was $1,553,000.

At June 30, 2007, and December 31, 2006, the Company’s share of the underlying net assets of Del-Tin Fiber exceeded its investment by $16,823,000 and $16,883,000, respectively. The excess relates primarily to the Company’s write-off of its carrying amount for its investment in Del-Tin Fiber as of December 31, 2002, and the estimated fair value of the guarantee of Del-Tin Fiber’s credit agreement recorded by the Company in its consolidated balance sheet.

8

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 3 – Investment in Del-Tin Fiber (cont.)

The financial position for Del-Tin Fiber as of the balance sheet dates and results of operations consisted of the following:

Condensed Balance Sheet Information

(Thousands of dollars)	June 30, 2007		December 31, 2006
Current assets	$	9,030	8,923
Property, plant, and equipment—net		83,866	85,393
Other noncurrent assets		186	285
Total assets	$	93,082	94,601
Current liabilities	$	12,042	10,836
Long-term debt		36,500	39,500
Members’ capital		44,540	44,265
Total liabilities and members’ capital	$	93,082	94,601

Condensed Income Statement Information

	Three Months Ended June 30,					Six Months Ended June 30,
(Thousands of dollars)	2007			2006		2007		2006
Net sales	$	15,050		17,017		30,782		33,616
Cost and expenses
Cost of sales		11,095		12,338		23,737		25,229
Depreciation		1,448		1,431		2,979		2,960
General and administrative expenses		605		742		1,264		1,427
Total costs and expenses		13,148		14,511		27,980		29,616
Operating income		1,902		2,506		2,802		4,000
Interest income		18		22		31		38
Interest and other debt expense		(803	)	(840	)	(1,626	)	(1,625	)
Other income/(loss)		(73	)	(71	)	(73	)	(71	)
Net income	$	1,044		1,617		1,134		2,342

9

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 4 – Timber and Timberlands

Timber and timberlands at the balance sheet dates consisted of the following:

(Thousands of dollars)	June 30, 2007			December 31, 2006
Purchased stumpage inventory	$	1,169		855
Timberlands		81,183		80,771
Fee timber		207,121		204,826
Logging facilities		1,906		1,862
		291,379		288,314
Less accumulated cost of fee timber harvested and facilities depreciation		(83,798	)	(80,677	)
	$	207,581		207,637

Note 5 – Property, Plant, and Equipment

Property, plant, and equipment at the balance sheet dates consisted of the following:

(Thousands of dollars)	June 30, 2007			December 31, 2006
Land	$	125		125
Land improvements		4,536		4,536
Buildings and structures		9,671		9,641
Machinery and equipment		89,689		87,491
		104,021		101,793
Less accumulated depreciation		(64,549	)	(60,868	)
	$	39,472		40,925

Note 6 – Indebtedness

On March 30, 2007, the Company entered into an agreement with American AgCredit PCA to amend and restate the terms of the Company’s Series A Senior Notes (“Notes”) in the principal amount of $40,000,000. Under the new agreement the Notes are due and payable December 18, 2016. Prior to said agreement, such Notes would have become due on December 18, 2008, pursuant to a Note Purchase Agreement effective December 18, 1998. The interest rate for the Notes remains the same as under the 1998 agreement (6.66 percent) through December 18, 2008, and after such date the interest rate is reduced to 6.10 percent for the balance of the term of the Notes. Customary provisions including representations from the Company and affirmative and negative covenants applicable to the Company’s business are contained in the agreement.

10

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 7 – Income Taxes

The Company adopted the provisions of FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, on January 1, 2007. The Company identified its tax positions to determine whether the resulting tax benefits should be recognized in the financial statements and to what extent. As a result of this analysis, the Company identified the following items applicable to the implementation of FIN 48. At or before settlement, management may change its assessment of the amount that will be realized upon ultimate settlement with the tax authority.

The Company has previously taken certain tax positions associated with its real estate activities but had not recorded a tax benefit for financial statement purposes because of uncertainty that they would prevail in a tax examination. Upon adopting the provisions of FIN 48, the Company determined that these positions would meet the more-likely-than-not recognition threshold as defined by FIN 48. The Company recorded an adjustment of $565,000 for the cumulative effect of the changes on retained earnings in the consolidated statement of income as of the date of adoption. Based on its historical accounting policy for consideration of tax law uncertainties, the Company does not believe that previously recognizing those costs was an error (as defined by FASB Statement No. 154, Accounting Changes and Error Corrections).

Upon adopting the provisions of FIN 48, the Company evaluated its accelerated depreciation deductions for tax purposes and determined that a certain position would not meet the more-likely-than-not recognition threshold as defined by FIN 48. The Company has previously not recorded the related tax benefit for financial statement purposes until the statute of limitations expire for the applicable tax year. As a result of the adoption of FIN 48, the Company reclassified $84,000 of the $230,000 liability from long-term deferred tax liabilities to current liabilities. In addition, the Company recorded $41,000 of previously unrecognized penalties and interest as a cumulative effect of the change to retained earnings. The Company recorded $28,000 in potential penalties and interest during the current year. There were no material changes for this position during the six months ended June 30, 2007.

Two of the Company’s subsidiaries have taken certain state income tax positions associated with their real estate activities. Prior to January 1, 2007, there was no financial statement impact due to utilization of certain state net operating loss carry-forwards. During the six months ended June 30, 2007, the Company had fully utilized these carry-forwards and received a cash flow benefit. Because the Company does not believe this tax position would meet the more-likely-than-not recognition threshold, a current liability of $782,000 was recorded in the accompanying consolidated balance sheet. There were no material changes for this position during the six months ended June 30, 2007.

The Company is no longer subject to U.S. federal and Arkansas examinations by tax authorities for years before 2003.

11

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 8 – Employee and Retiree Benefit Plans

Components of net periodic retirement expense and other postretirement benefits expense consisted of the following:

	Three Months Ended June 30,					Six Months Ended June 30,
(Thousands of dollars)	2007			2006		2007		2006
Funded qualified retirement plan
Service cost	$	260		240		521		481
Interest Cost		322		288		644		576
Expected return on plan assets		(312	)	(277	)	(623	)	(554	)
Amortization of prior service cost		16		16		31		31
Recognized actuarial loss		50		60		100		120
Net retirement expense	$	336		327		673		654
Unfunded nonqualified retirement plan
Service cost	$	35		18		69		35
Interest cost		44		36		88		71
Amortization of prior service cost		(3	)	(3	)	(6	)	(5	)
Recognized actuarial loss		10		1		20		3
Net retirement expense	$	86		52		171		104
Other postretirement benefits
Service cost	$	114		138		228		275
Interest cost		112		132		224		263
Amortization of prior service cost		—		19		—		39
Amortization of plan amendment		(44	)	—		(88	)	—
Recognized actuarial loss		23		4		46		9
Other postretirement benefits expense	$	205		293		410		586

The Company made contributions to its qualified plan of $899,000 during the first six months of 2007. The Company anticipates making total contributions of $2,048,000 for the year 2007.

Effective January 1, 2007, the Company no longer offers prescription drug coverage under its other postretirement benefits plan to post-65 retirees.

12

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 9 – Stock-Based Compensation

The Consolidated Statement of Income for the six months ended June 30, 2007 and 2006, included $1,806,000 and $990,000, respectively, of stock-based compensation expense reflected in general and administrative expenses.

Stock Options – A summary of stock options as of June 30, 2007, and changes during the six-month period then ended are presented below:

Options	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value ($ 000)
Outstanding at January 1, 2007	255,031		$	33.25
Granted	25,344			53.01
Exercised	(34,091	)		26.91
Forfeited/expired	(3,275	)		38.79
Outstanding at June 30, 2007	243,009			36.12	5.6	—
Exercisable at June 30, 2007	177,327			31.36	4.5	—

Restricted Stock and Restricted Stock Units – A summary of nonvested restricted stock as of June 30, 2007, and changes during the six-month period then ended are presented below:

Nonvested Restricted Stock	Shares		Weighted Average Grant-Date Fair Value
Nonvested at January 1, 2007	48,522		$	41.74
Granted	19,006			53.01
Vested	—			—
Forfeited	(778	)		44.10
Nonvested at June 30, 2007	66,750			44.92

As of June 30, 2007, there was $1,594,000 of unrecognized compensation cost related to nonvested restricted stock. That cost is expected to be recognized over a weighted-average period of 2.1 years. No restricted stock vested during the six months ended June 30, 2007.

13

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 9 – Stock-Based Compensation (cont.)

Performance Units – A summary of nonvested restricted stock performance units as of June 30, 2007, and changes during the six months then ended are presented below:

Nonvested Restricted Stock	Shares		Weighted Average Grant-Date Fair Value
Nonvested at January 1, 2007	36,999		$	43.52
Granted	10,570			55.97
Vested	—			—
Forfeited	(882	)		45.67
Nonvested at June 30, 2007	46,687			46.30

As of June 30, 2007, there was $1,141,000 of unrecognized compensation cost related to nonvested restricted stock performance units. That cost is expected to be recognized over a weighted-average period of 2.1 years. No restricted stock performance units vested during the six months ended June 30, 2007.

Note 10 – Contingencies

On March 28, 2007, the Company and Central Arkansas Water (“CAW”), a consolidated waterworks, entered into a full and complete settlement of a pending condemnation litigation involving 680.06 acres of real property located within the watershed of Lake Maumelle in western Pulaski County, Arkansas. Approximately 640 acres were part of the Company’s planned real estate development, The Ridges at Nowlin Creek. The Company will continue to assess the viability of proceeding with the remaining part of its The Ridges at Nowlin Creek planned development. Under the terms of the settlement, CAW has paid the Company $8,175,000 (approximately $12,021 per acre) for the land, and granted the Company a 90-year option to repurchase the land for the same amount should CAW determine the land is not needed for watershed protection or if it ceases to use the land for such purpose. During the three months ended March 31, 2007, the Company recorded sales revenues of $8,175,000 and related costs of $675,000 for a net operating gain of $7,500,000 on this transaction.

At various times, the Company may be involved in litigation incidental to its operations. Currently, there are no material legal proceedings outstanding.

14

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 11 – Earnings per Common Share

The amounts used in computing earnings per share consisted of the following:

	Three Months Ended June 30,			Six Months Ended June 30,
(Thousands, except per share amounts)	2007		2006	2007	2006
Net income	$	2,538	2,984	9,187	6,952
Weighted average number of common shares used in basic EPS		12,480	12,401	12,472	12,384
Effect of dilutive stock options		50	75	56	86
Weighted average number of common shares and dilutive potential common stock used in EPS assuming dilution		12,530	12,476	12,528	12,470
Earnings per common share
Basic	$	.20	.24	.74	.56
Assuming dilution	$	.20	.24	.72	.55

Note 12 – Supplemental Cash Flow Disclosures

(Increases)/decreases in working capital, other than cash and cash equivalents, consisted of the following:

	Six Months Ended June 30,
(Thousands of dollars)	2007			2006
Trade accounts receivable, net	$	(2,367	)	(1,481	)
Other receivables		563		(157	)
Inventories		(219	)	2,012
Prepaid expenses and other current assets		(672	)	538
Trade accounts payable		(462	)	(2,003	)
Accrued taxes other than income taxes		805		845
Deferred revenues and other accrued liabilities		2,422		685
	$	70		439
Additional supplemental information:
Interest paid, net of amounts capitalized	$	2,580		2,442
Income taxes paid, net of refunds	$	2,164		4,887

15

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 13 – Business Segments

Information about the Company’s business segments consisted of the following:

	Three Months Ended June 30,					Six Months Ended June 30,
(Thousands of dollars)	2007			2006		2007		2006
Net sales
Woodlands	$	7,110		9,880		21,316		22,193
Mills		24,150		30,867		46,440		61,752
Real Estate		10,392		6,630		21,960		11,450
Eliminations*		(3,747	)	(5,967	)	(11,434	)	(12,739	)
	$	37,905		41,410		78,282		82,656
Income/(loss) before income taxes
Operating income
Woodlands	$	4,047		6,501		14,036		15,020
Mills		(693	)	(173	)	(2,666	)	1,373
Real Estate		5,224		1,473		12,574		2,135
Corporate		(4,303	)	(3,245	)	(7,715	)	(6,720	)
Eliminations		40		449		(231	)	458
Operating income		4,315		5,005		15,998		12,266
Equity in Del-Tin Fiber		724		808		972		1,171
Interest income		236		107		389		141
Interest and other debt expense		(1,253	)	(1,345	)	(2,593	)	(2,737	)
Interest capitalized		165		285		305		531
Other income		78		95		205		147
	$	4,265		4,955		15,276		11,519
Depreciation, amortization, and cost of fee timber harvested
Woodlands	$	1,161		1,450		3,216		3,370
Mills		1,855		1,678		3,681		3,308
Real Estate		156		147		292		292
Corporate		23		42		65		85
	$	3,195		3,317		7,254		7,055
Capital expenditures
Woodlands	$	385		1,452		3,172		2,243
Mills		599		2,617		1,477		4,840
Real Estate		1,679		3,923		4,629		5,034
Corporate		27		33		41		48
	$	2,690		8,025		9,319		12,165

* Intersegment sales of timber from Woodlands to Mills

16

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 14 – Subsequent Event

On August 7, 2007, Deltic amended its revolving credit agreement whereby the amount of commitments available under the facility were increased from $260 million to $300 million. Pursuant to the amendment: the term of the revolving credit agreement, subject to other provisions, was extended to September 9, 2012; pricing of applicable commitment fees and margins was amended; an option to request an increase in the amount of Aggregate Revolving Commitments from $300 million to $350 million was reinstated; certain covenants were amended and/or deleted; and, provisions that permit inclusion of thepro formaimpact of certain acquisitions in determining compliance by Deltic to applicable terms were added.

17

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Overview

The Company recorded net income of $2.6 million for the second quarter of 2007 compared to $3 million for the same period of 2006. While several factors affected the Company’s results for the period, the most significant impact came from the depressed housing market, which was evidenced by the lower demand and sales prices for lumber manufactured in Deltic’s Mills segment and fewer sales of residential lots in the Real Estate segment. Deltic’s Woodlands segment provided $4 million in operating income in the second quarter. The Real Estate segment provided $5.2 million in operating income for the second quarter of 2007, mainly due to the sale of approximately 26 acres of commercial real estate. The Company’s Mills segment recorded an operating loss of $.7 million in 2007’s second quarter. Deltic owns a 50 percent interest in Del-Tin Fiber L.L.C. and recorded related equity income of $.8 million for the second quarter of 2007, down slightly from $.9 million for the same quarter of 2006.

Deltic is primarily a wood products producer operating in a commodity-based business environment, with a major diversification in real estate development. This environment is affected by a number of factors including general economic conditions, interest rates, imports, foreign exchange rates, housing starts, residential repair and remodeling, commercial construction, industry capacity and production levels, the availability of raw material, and weather conditions. The downward trend in new home sales began in the second half of 2005, and the level of housing starts reached its slowest pace in more than six years during the first half of 2007. Factors affecting this decline in new home sales were a somewhat slower American economy, higher mortgage interest rates, increased home inventory levels, and the impact of stricter lending practices due to sub-prime loans failing in the mortgage banking industry. The Company’s sales of real estate were affected by these factors which helped to cause a reduction in residential lot sales from the first half of 2006. This decline in the housing market has been a significant factor to continued lower demand in the first six months of 2007 for softwood lumber products. The market has recently experienced slight sales price increases due to reduced lumber supplies caused by industry curtailments and declining imports of softwood lumber products from Canada, mainly related to the rise in the value of the Canadian dollar. Given its relative size and the nature of most commodity markets, the Company has little or no control over pricing levels for its lumber; therefore, the Company will continue to focus on increasing efficiencies and reducing controllable manufacturing cost

For the second quarter of 2007, pine sawtimber harvest levels decreased 57,376 tons to 96,431 when compared to the second quarter of 2006. The primary reason for this decline was management’s decision to accelerate the 2007 sale of pine sawtimber to third-parties during the first quarter of 2007 in order to optimize the return on the pine sawtimber harvest. The Company plans to keep 2007’s total pine sawtimber harvest volume comparable to the level in 2006, while continuing to manage the timberlands on a sustainable-yield basis. Ultimately, the Company’s ability to sell pine sawtimber at acceptable prices in the future will be dependent upon the health of the markets for manufactured lumber and other wood products. The Company harvested 111,593 tons of pine pulpwood during the second quarter of 2007, an increase of 15,622 tons from the same period in 2006. The average sales price was $13 per ton, a 55 percent increase from $8 for the second quarter of 2006. Deltic recorded an increase in pine pulpwood revenues of $.6 million when compared to the second quarter a year ago. Increased demand and prices for pulpwood has been attributed in part to reduced production of residual wood chips from area sawmills due to production curtailments caused by a depressed lumber market, and to the impact of wet weather conditions on pulpwood harvesting activity in the Company’s operating region. The Company sold approximately 63 acres of timberland for $1,557 per acre during the second quarter of 2007 versus 160 acres of timberland at $1,047 per acre during the same period of 2006.

Advances in technology and increased pricing levels for natural gas have resulted in the viability of expanded natural gas exploration within the state of Arkansas. One current area of activity known as the “Fayetteville Shale Play” is an unconventional natural gas reservoir spread across multiple Arkansas counties. Deltic has leased approximately 26,000 net mineral acres in this area to various exploration enterprises and received applicable lease bonus payments; in addition to the possibility of future royalty income should production be established. The Company continues to evaluate additional leasing

18

requests within the Fayetteville Shale Play, although future leasing will probably not be significant unless the defined boundary of the Play expands. The ultimate benefit to Deltic from these mineral leases is contingent on the successful extraction and sale of natural gas from the area.

The Mills segment continues to encounter a depressed lumber market which caused the average sales price in the second quarter of 2007 to decrease $29, or nine percent, to $306 from the second quarter of 2006 average of $335 per MBF. Lumber sales declined in the second quarter of 2007 by 18 percent to 63.8 million board feet from the second quarter of 2006, primarily due to a reduction in operating hours as a result of weakened market conditions. As with any commodity market, the Company expects the historical volatility of lumber prices to continue in the future. The Company continues to anticipate a significant percentage of logs supplied to both of its sawmills will come from strategically located Company fee timberlands.

The Real Estate segment closed the sale of 20 residential lots during the second quarter, a reduction of 12 residential lots when compared to the same quarter in 2006. The average sales price per lot declined 28 percent, to $87,900, when compared to the same quarter last year. The reported average sales price for residential lots for a specific period is dependent upon the mix of lot sales. Deltic’s lot development plans provide for a mix of lot offerings that represent most real estate market segments for planned communities. Due to the pace of new home starts and the current sufficient lot inventory, planned capital expenditures for residential lot development have been reduced for 2007. The Company does not plan to offer any additional lots within Chenal Valley in 2007. The Company sold 17 lots within the Chenal Valley development in the second quarter of 2007 versus 26 during the same period of 2006. In Deltic’s other two developments, Red Oak Ridge and Chenal Downs, three lots were sold during the second quarter of 2007 versus six during the same period of 2006. Chenal Downs is fully developed and Deltic does not plan to develop any additional lots within Red Oak Ridge in 2007. Future annual development activity will be dependent upon the demand for the Company’s residential lots. Two commercial sales of approximately 26 acres at $241,000 per acre occurred in the second quarter of 2007 while there were no commercial sales for the same period in 2006. Both of these sales were for use as multifamily housing and one will consist of the first condominium project on the golf courses in the Company’s Chenal Valley development. Even though residential lot sales activity is below historical levels, interest in commercial acreage, especially for multifamily use, remains strong.

During 2004, the Company disclosed plans for a 1,170-acre, 187 lot, upscale residential development, The Ridges at Nowlin Creek, on a portion of its land holdings located within the Highway 10 growth corridor west of Chenal Valley. A portion of the development would have been located within the watershed of Lake Maumelle, a principal source of drinking water for Little Rock. Even though the Company’s development plans incorporated the most modern and proven best management practices to create a low impact development fully protective of water quality in the lake, and the local water utility, Central Arkansas Water, had just commissioned preparation of a new comprehensive watershed management plan, the water utility nonetheless commenced an action in September 2005 to condemn approximately 680 acres of Company land located within the watershed, including approximately 640 acres of The Ridges at Nowlin Creek. On March 28, 2007, the Company and Central Arkansas Water entered into a full and complete settlement of the condemnation. Pursuant to the terms of the settlement, the Company sold Central Arkansas Water 680.06 acres of land for $8.2 million, and Central Arkansas Water granted to the Company an option to repurchase said land for the same consideration should Central Arkansas Water determine the land is not needed for watershed protection or should Central Arkansas Water cease to utilize said land for such purpose. The term of the option is 90 years. The Company intends to further assess the viability of proceeding to develop the remaining acreage of its planned real estate development, The Ridges at Nowlin Creek.

Operating results for Del-Tin Fiber L.L.C. are affected by the overall medium density fiberboard (“MDF”) market and the plant’s operating performance. Del-Tin experienced a reduction in operational income during the first half of 2007, because of decreased production due to uncertain market conditions for traditional products and available supply of fiber. For the Company’s equity, these decreases were partially offset by the reduction in depreciation expense related to the add-back per thousand square feet (“MSF”) of impairment based on the remaining production life of Del-Tin’s production assets.

19

On June 21, 2007, the Board of Directors of Deltic announced a quarterly dividend of $0.075 per share that will be paid to stockholders of record as of September 1, 2007, with a payment due date of September 15, 2007. The liability for this dividend was recorded in the Company’s second quarter consolidated financial statements. In 2006, this announcement was made at the August Board of Directors Meeting and recorded in the third quarter’s consolidated financial statements.

Results of Operations

Three Months Ended June 30, 2007 Compared with Three Months Ended June 30, 2006

In the following tables, Deltic’s net sales and results of operations are presented for the quarters ended June 30, 2007 and 2006. Explanations of significant variances and additional analyses for the Company’s consolidated and segmental operations follow the tables.

	Quarter Ended June 30,
(Millions of dollars, except per share amounts)	2007			2006
Net sales
Woodlands	$	7.1		9.9
Mills		24.1		30.9
Real Estate		10.4		6.6
Eliminations		(3.7	)	(5.9	)
Net sales	$	37.9		41.5
Operating income/(loss) and net income
Woodlands	$	4.0		6.5
Mills		(.7	)	(.2	)
Real Estate		5.2		1.4
Corporate		(4.3	)	(3.2	)
Eliminations		.1		.5
Operating income		4.3		5.0
Equity in Del-Tin Fiber		.8		.9
Interest income		.2		.1
Interest and other debt expense		(1.3	)	(1.3	)
Interest capitalized		.2		.3
Other income		.1		.1
Income taxes		(1.7	)	(2.1	)
Net income	$	2.6		3.0
Earnings per common share
Basic	$	.20		.24
Assuming dilution	$	.20		.24

20

Consolidated

The $.4 million decrease in net income was primarily the result of decreased pine sawtimber harvest at a $7 per ton lower sales price, decreased lumber sales at a nine percent lower sales price, and higher general and administrative expenses, which were partially offset by improved results from the Real Estate segment due to sales of commercial real estate.

Operating income decreased $.7 million. The Woodlands segment decreased $2.5 million due primarily to decreased pine sawtimber harvest levels at a 15 percent lower average price per ton when compared to the second quarter of 2006. Deltic’s Mills segment operations decreased $.5 million due mainly to a $29, or nine percent, per MBF decrease in the average lumber sales price combined with an 18 percent decrease in lumber sales volume. Real Estate operating income increased $3.8 million primarily due to the sale of approximately 26 acres of commercial real estate. Corporate operating expense increased $1.1 million due to increased general and administrative expenses resulting from taxes on stock-based awards and a one-time charge associated with the retirement of a Company officer.

Woodlands

Selected financial and statistical data for the Woodlands segment is shown in the following table.

	Quarter Ended June 30,
	2007		2006
Net sales (millions of dollars)
Pine sawtimber	$	3.7		7.1
Pine pulpwood		1.4		.8
Hardwood sawtimber		—		—
Hardwood pulpwood		.1		.1
Sales volume (thousands of tons)
Pine sawtimber		96.4		153.8
Pine pulpwood		111.6		96.0
Hardwood sawtimber		1.1		1.7
Hardwood pulpwood		14.6		19.2
Sales price (per ton)
Pine sawtimber	$	39		46
Pine pulpwood		13		8
Hardwood sawtimber		22		25
Hardwood pulpwood		9		4
Timberland
Net sales (million of dollars)	$	.1		.2
Sales volume (acres)		63.52		160.00
Sales price (per acre)	$	1,557	$	1,047

Net sales decreased $2.8 million. Sales of pine sawtimber decreased $3.4 million due to a 37 percent lower sales volume at a $7 per ton, or 15 percent, lower average sales price. Sales of pine pulpwood increased $.6 million due to a 15.6 thousand ton increase in harvest at a $5 per ton, or 55 percent, higher average sales price. Despite the segment’s decrease in net sales, the cost of fee timber harvested had only a slight drop due primarily to the mix of pine sawtimber harvest volume by Company. The decline in operating results was due primarily to the decrease in net sales.

21

Mills

Selected financial and statistical data for the Mills segment is shown in the following table.

	Quarter Ended June 30,
	2007		2006
Net sales (millions of dollars)
Lumber	$	19.5	26.1
Residual by-products		3.5	3.6
Lumber
Finished production (MMBF)		63.0	74.0
Sales volume (MMBF)		63.8	78.2
Sales price (per MBF)	$	306	335

Net sales decreased $6.8 million, or 22 percent, due primarily to lower lumber sales price and volume. The increase in the Mills segment’s operating loss was due primarily to the same factors impacting net sales.

Real Estate

Selected financial and statistical data for the Real Estate segment is shown in the following table.

	Quarter Ended June 30,
	2007		2006
Net sales (millions of dollars)
Residential lots	$	1.8	3.9
Commercial acreage		6.3	—
Undeveloped acreage		—	—
Chenal Country Club		2.2	2.0
Sales volume
Residential lots		20	32
Commercial acres		25.99	—
Undeveloped acres		—	—
Average sales price (thousands of dollars)
Residential lots	$	88	121
Commercial acres		241	—
Undeveloped acres		—	—

Net sales increased $3.8 million due primarily to an increase in sales of commercial real estate. This was partially offset by a 12 lot decrease in residential lots sold and a 28 percent decrease in the average price per lot due to sales mix. The increase in the Real Estate segment’s operating income was due primarily to the same factors impacting net sales.

Corporate

The increase in operating expense for Corporate functions of $1.1 million was due primarily to increased general and administrative expenses resulting from taxes on stock-based awards and a one-time charge associated with the retirement of a Company officer.

22

Eliminations

Intersegment sales of timber from Deltic’s Woodlands to the Mills segment decreased $2.2 million to $3.7 million. The decrease was due to decreases in the volume of logs coming into Deltic sawmills from its fee timberlands at a decreased transfer price from the Woodlands segment. Transfer prices are approximately that of market, which were lower than the same quarter last year.

Equity in Del-Tin Fiber

For the second quarter of 2007, Deltic’s equity in Del-Tin Fiber was $.8 million compared to $.9 million for the same period of 2006.

Additional selected financial and statistical data for Del-Tin Fiber is shown in the following table.

	Quarter Ended June 30,
	2007		2006
Net sales (millions of dollars)	$	15.1	17.0
Finished production (MMSF)		30.5	36.1
Board sales (MMSF)		30.3	36.9
Sales price (per MSF)	$	496	461

Income Taxes

The effective income tax rate was 40 percent and for both the 2007 and 2006 periods.

Six Months Ended June 30, 2007 Compared with Six Months Ended June 30, 2006

In the following tables, Deltic’s net sales and results of operations are presented for the six-month periods ended June 30, 2007 and 2006. Explanations of significant variances and additional analyses for the Company’s consolidated and segmental operations follow the tables.

	Six Months Ended June 30,
(Millions of dollars, except per share amounts)	2007			2006
Net sales
Woodlands	$	21.3		22.2
Mills		46.4		61.8
Real Estate		22.0		11.4
Eliminations		(11.4	)	(12.7	)
Net sales	$	78.3		82.7

23

	Six Months Ended June 30,
(Millions of dollars, except per share amounts)	2007			2006
Operating income/(loss) and net income
Woodlands	$	14.0		15.0
Mills		(2.7	)	1.4
Real Estate		12.6		2.1
Corporate		(7.7	)	(6.7	)
Eliminations		(.2	)	.5
Operating income		16.0		12.3
Equity in Del-Tin Fiber		1.0		1.2
Interest income		.4		.1
Interest and other debt expense		(2.6	)	(2.6	)
Interest capitalized		.3		.5
Other income/(expense)		.2		.2
Income taxes		(6.1	)	(4.7	)
Net income	$	9.2		7.0
Earnings per common share
Basic	$	.74		.56
Assuming dilution	$	.72		.55

Consolidated

The $2.2 million increase in net income was the result of increased operating income from Deltic’s Real Estate segment, partially offset by the reduced financial results of the Woodlands and Mills segments, an increase in corporate general and administrative expense, and a decrease in equity in Del Tin Fiber.

Operating income increased $3.7 million. The Woodlands segment decreased $1 million due primarily to a decreased pine sawtimber harvest level and a decreased average per-ton pine sawtimber price. The Mills segment decreased $4.1 million due mainly to a 14 percent decrease in average lumber sales price and decreased sales volume. Real Estate operating income increased $10.5 million, primarily the result of sales of commercial real estate and undeveloped land, partially offset by a decrease in the number of residential lots sold at a lower average price per lot. Corporate operating expense increased $1 million due to higher general and administrative expenses.

Woodlands

Selected financial and statistical data for the Woodlands segment is shown in the following table.

	Six Months Ended June 30,
	2007		2006
Net sales (millions of dollars)
Pine sawtimber	$	13.8	17.1
Pine pulpwood		3.4	1.5
Hardwood sawtimber		.1	.1
Hardwood pulpwood		.2	.2
Sales volume (thousands of tons)
Pine sawtimber		333.3	367.7
Pine pulpwood		261.7	183.5
Hardwood sawtimber		1.9	3.8
Hardwood pulpwood		27.5	38.4

24

	Six Months Ended June 30,
	2007		2006
Sales price (per ton)
Pine sawtimber	$	41	46
Pine pulpwood		13	8
Hardwood sawtimber		27	27
Hardwood pulpwood		8	5
Timberland
Net sales (millions of dollars)	$	.1	.2
Sales volume (acres)		63.52	160.00
Sales price (per acre)	$	1,557	1,047

Total net sales decreased $.9 million, which was due primarily to the decrease in sales volume of pine sawtimber combined with a decrease in the average sales price per-ton, partially offset by an increase in pine pulpwood harvest and sales price and an increase in lease income. Operating income decreased $1 million primarily as a result of the decreased net sales.

Mills

Selected financial and statistical data for the Mills segment is shown in the following table.

	Six Months Ended June 30,
	2007		2006
Net sales (millions of dollars)
Lumber	$	37.5	52.3
Residual by-products		6.9	7.3
Lumber
Finished production (MMBF)		121.8	144.2
Sales volume (MMBF)		125.4	150.0
Sales price (per MBF)	$	299	349

Total net sales decreased $15.4 million, due to the segment’s 14 percent lower average lumber sales price and 16 percent decrease in sales volume. Total operating income for the Mills declined $4.1 million due to the impact of lower net sales which was partially offset by a lower cost to produce the volume associated with fewer sales and a higher average sales price for residual products.

Real Estate

Selected financial and statistical data for the Real Estate segment is shown in the following table.

	Six Months Ended June 30,
	2007		2006
Net sales (millions of dollars)
Residential lots	$	3.2	6.7
Commercial sites		6.3	—
Undeveloped acreage		8.2	—
Chenal Country Club		3.6	3.3

25

	Six Months Ended June 30,
	2007		2006
Sales volume
Residential lots		34	59
Commercial acres		25.99	—
Undeveloped acreage		680.06	—
Average sales price (thousands of dollars)
Residential lots	$	93	114
Commercial acres		241	—
Undeveloped acreage		12	—

Total net sales increased $10.6 million, or 93 percent, due to increased sales of commercial acreage and undeveloped real estate, partially offset by reductions in sales of residential lots. The number of residential lots sold during 2007 decreased by 25 lots, or 42 percent, compared to 2006. The average sales price per lot decreased by 18 percent due to sales mix. The increase in the Real Estate segment’s operating income was due primarily to the same factors impacting net sales.

Corporate

The increase in operating expense for Corporate functions of $1 million was due primarily to increased general and administrative expenses resulting from taxes on stock-based awards and a one-time charge associated with the retirement of a Company officer.

Eliminations

Intersegment sales of timber from Deltic’s Woodlands to the Mills segment decreased $1.3 million to $11.4 million. The decrease was due to decreases in both the volume and price of logs coming into Deltic’s sawmills from its fee timberlands. Logs supplied by the Woodlands segment to the Company’s sawmills are transferred at prices that approximate market.

Equity in Del-Tin Fiber

For the first six months of 2007, equity in Del-Tin Fiber was $1 million, a decline of $.2 million from the same period last year. Del-Tin experienced a reduction in operating income during the first half of 2007 because of decreased production related to uncertain market conditions for traditional products and available fiber supply.

Additional selected financial and statistical data for Del-Tin Fiber is shown in the following table.

	Six Months Ended June 30,
	2007		2006
Net sales (millions of dollars)	$	30.8	33.6
Finished production (MMSF)		61.0	75.9
Board sales (MMSF)		63.8	77.9
Sales price (per MSF)	$	483	431

Average sales price increased 12 percent due to a change in product mix to include a greater percentage of thin board and to an increase in premium-grade production.

26

Income Taxes

The effective income tax rate was 40 percent for both 2007 and 2006 periods.

Liquidity and Capital Resources

Cash Flows and Capital Expenditures

Net cash provided by operating activities totaled $18 million for the first half of 2007 compared to $19.7 million for the same period in 2006. Changes in operating working capital, other than cash and cash equivalents, provided cash of $.1 million in the 2007 period compared to $.4 million in 2006. The Company’s accompanying Consolidated Statements of Cash Flows identify other differences between net income and cash provided by operating activities for each reporting period.

Capital expenditures required cash of $9.3 million in the current-year period and $12 million a year ago. Capital expenditures by segment consisted of the following:

	Six Months Ended June 30,
(Thousands of dollars)	2007		2006
Woodlands	$	3,172	2,243
Mills		1,477	4,840
Real Estate		4,629	5,034
Corporate		41	48
Capital expenditures		9,319	12,165
Non-cash land exchange		—	(147	)
Capital expenditures requiring cash	$	9,319	12,018

The net change in purchased stumpage inventory utilized in the Company’s sawmill operations required cash of $.3 million in 2007, compared to $1.3 million in 2006. The Company made advances to Del-Tin Fiber of $1.2 million during the current period, which decreased $.5 million from the corresponding period of 2006. The Company received $1.7 million in cash distributions from Del-Tin Fiber in 2007 and 2006, which offset the funds advanced. Deltic received proceeds from other investing activities of $1 million in 2007 and $1.4 million in 2006. During 2007, Deltic had no borrowings or repayments under its revolving credit facility. In 2006, there were debt repayments of $4.5 million. Deltic paid dividends on common stock of $1.9 million during the current period in 2007 and for the same period in 2006. In 2007, proceeds from stock option exercises amounted to $.9 million, a decrease of $1 million when compared to 2006. In 2007, the beneficial tax effect of stock options exercised was $.3 million and $.5 million in 2006.

Financial Condition

Working capital totaled $19.8 million at June 30, 2007, and $12.7 million at December 31, 2006. Deltic’s working capital ratio at June 30, 2007, was 2.26 to 1 compared to 2.15 to 1 at the end of 2006. Cash and cash equivalents at the end of the second quarter of 2007 were $20.6 million compared to $11.4 million at the end of 2006. During the first half of 2007 and 2006, total indebtedness of the Company was $70 million. Deltic’s long-term debt to stockholders’ equity ratio was ..322 to 1 at June 30, 2007, compared to .337 to 1 at year-end 2006.

Liquidity

The primary sources of the Company’s liquidity are internally generated funds, access to outside financing, and working capital. The Company’s current strategy for growth continues to emphasize its timberland acquisition program, in addition to expanding lumber production as market conditions allow, and developing real estate at Chenal Valley and Red Oak Ridge.

27

In December 2000, the Company’s Board of Directors authorized a stock repurchase program of up to $10 million of Deltic common stock. Since December of 2000, the Company has expended $2.1 million under this program, with the purchase of 96,206 shares at an average cost of $22.34 per share; no shares have been purchased thus far in 2007 under this program. In its two previously completed repurchase programs, Deltic purchased 479,601 shares at an average cost of $20.89 and 419,542 shares at a $24.68 per share average cost, respectively.

Off-Balance Sheet Arrangements, Contractual Obligations, and Commitments

Prior to August 26, 2004, the Company had agreed to a contingent equity contribution agreement with Del-Tin Fiber and the group of banks from whom Del-Tin Fiber had obtained its $89 million credit facility. Under this agreement, Deltic and the other 50 percent owner of the joint venture had agreed to fund any deficiency in contributions to either Del-Tin Fiber’s required sinking fund or debt service reserve, up to a cumulative total of $17.5 million for each owner. In addition, each owner had committed to a production support agreement, under which each owner had agreed to make support obligation payments to Del-Tin Fiber to provide, on the occurrence of certain events, additional funds for payment of debt service until the plant was able to successfully complete a minimum production test. Both owners had also agreed, in a series of one-year term commitments, to fund any operating working capital needs until the facility was able to consistently generate sufficient funds to meet its cash requirements.

On August 26, 2004, Del-Tin Fiber refinanced its existing long-term debt by entering into a credit agreement consisting of a letter of credit and term loan with multiple lending institutions. The funds provided from this credit agreement were used, together with the existing balance in Del-Tin Fiber’s debt service reserve and bond sinking fund accounts, to redeem $60 million of its $89 million industrial revenue bonds. Under the new credit agreement, the lenders, on September 1, 2004, loaned Del-Tin Fiber $30 million which will be repayable over five years in equal quarterly installments, beginning December 31, 2004, and issued on Del-Tin Fiber’s behalf, a letter of credit in the amount of $29.7 million to support the remaining industrial revenue bonds originally issued in 1998 by Union County, Arkansas. Concurrent with this event, on August 26, 2004, Deltic executed a guarantee agreement in connection with the refinancing of the debt of Del-Tin Fiber. Under Deltic’s guarantee agreement, Deltic unconditionally guarantees the due and punctual payment of 50 percent ($21.3 million at June 30, 2007) of Del-Tin’s obligations under its credit agreement. This credit agreement of Del-Tin Fiber fully replaces Del-Tin Fiber’s prior credit facility, resulting in Deltic’s previous contingent equity contribution agreement of $17.5 million, the production support agreement, and the one-year commitment being fully extinguished.

The Company has adopted the provisions of FASB Interpretation (“FIN”) No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. In accordance with FIN 45, Deltic initially estimated the fair value of its guarantee of Del-Tin Fiber’s credit agreement to be $3.5 million and included this non-cash amount in the Company’s Consolidated Balance Sheet as a long-term liability with an offsetting increase in the Company’s investment in Del-Tin Fiber. Deltic is reducing this liability systematically over the life of the credit agreement, as the Company is released from risk under the guarantee. At June 30, 2007, Deltic’s remaining liability regarding the guarantee was $1.6 million.

The Company has both funded and unfunded noncontributory defined benefit retirement plans that cover the majority of its employees. The plans provide defined benefits based on years of service and final average salary. Deltic also has other postretirement benefit plans covering substantially all of its employees. The health care plan is contributory with participants’ contributions adjusted as needed; the life insurance plan is noncontributory. (For information about material assumptions underlying the accounting for these plans and other components of the plans, refer to Note 12 to the consolidated financial statements included in the Company’s 2006 annual report on Form 10-K.)

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Tabular summaries of the Company’s contractual cash payment obligations and other commercial commitment expirations as of June 30, 2007, by period, are presented in the following tables:

(Millions of dollars)	Total		During 2007	2008 to 2009	2010 to 2011	After 2011
Contractual cash payment obligations
Real estate development infrastructure	$	3.1	.4	2.7	—	—
Long-term debt		70.0	—	10.0	13.3	46.7
Interest on debt1		29.8	2.2	8.4	6.7	12.5
Retirement plans		9.4	—	1.8	2.2	5.4
Other postretirement benefits		10.7	.3	.9	1.1	8.4
Other long-term liabilities		4.7	—	3.5	1.2	—
	$	127.7	2.9	27.3	24.5	73.0
Other commercial commitment expirations
Guarantee of indebtedness of Del-Tin Fiber	$	21.3	1.5	19.8	—	—
Timber cutting agreements		.6	.4	.2	—	—
Operating leases		.2	.1	.1	—
Letters of credit		.3	.1	2	—	—
	$	22.4	2.1	20.3	—	—

¹ Interest commitments are estimated using the Company’s current interest rates for the respective debt agreements over their remaining terms to expiration.

Outlook

Deltic’s management believes that cash provided from its operations and the remaining amount available under its credit facility will be sufficient to meet its expected cash needs and planned expenditures, including those of the Company’s continued timberland acquisition and stock repurchase programs, additional advances to Del-Tin Fiber, and capital expenditures, for the foreseeable future.

Critical Accounting Policies and Estimates

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and potentially result in materially different results under different assumptions and conditions. The Company has prepared its consolidated financial statements in conformity with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the reported amounts in these financial statements and accompanying notes. Actual results could differ from those estimates under different assumptions or conditions. The Company has disclosed its critical accounting policies in its 2006 annual report on Form 10-K, and this disclosure should be read in conjunction with this Form 10-Q. There have been no changes in these identified critical policies, nor have there been any initially adopted accounting policies having a material impact on reported financial results.

Impact of Recently Effective Accounting Pronouncements

(For information regarding the impact of recently effective accounting pronouncements, refer to Note 1 to the consolidated financial statements.)

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Outlook

Pine sawtimber harvest levels are expected to be 150,000 to 160,000 tons in the third quarter of 2007 and 550,000 to 575,000 tons for the year. Finished lumber production and sales volume will continue to be subject to market conditions, and is estimated at 60 to 70 million board feet for the third quarter and 250 to 275 million board feet for the year. Residential lot sales are projected to be 15 to 25 lots and 65 to 85 lots for the third quarter and the year, respectively.

Certain statements contained in this report that are not historical in nature constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “expects”, “anticipates”, “intends”, “plans”, “estimates”, or variations of such words and similar expressions are intended to identify such forward-looking statements. These statements reflect the Company’s current expectations and involve certain risks and uncertainties, including those disclosed elsewhere in this report. Therefore, actual results could differ materially from those included in such forward-looking statements.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s market risk has not changed significantly from that set forth under the caption “Quantitative and Qualitative Disclosures About Market Risk”, in Item 7A of Part II of its 2006 annual report on Form 10-K. Those disclosures should be read in conjunction with this Form 10-Q.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Deltic Timber Corporation (“Deltic” or “the Company”) has established disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the officers who certify the Company’s financial reports and to other members of senior management and the Board of Directors.

Based on their evaluation as of June 30, 2007, the Chief Executive Officer and Chief Financial Officer of the Company have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

Changes in Internal Control Over Financial Reporting

Deltic’s management, with the Chief Executive Officer and Chief Financial Officer, have evaluated any changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter, and have concluded that there was no change to Deltic’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, Deltic’s internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, the Company is involved in litigation incidental to its business. Currently, there are no material legal proceedings.

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in Item 1A of Part I in the Company’s 2006 annual report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchase of Equity Securities:

Period	Total Number of Shares Purchased	Average Price Paid Per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs1
April 1 through April 30, 2007	—	—	—	$	7,851,000
May 1 through May 31, 2007	—	—	—	$	7,851,000
June 1 through June 30, 2007	—	—	—	$	7,851,000

¹ In December 2000, the Company’s Board of Directors authorized a stock repurchase plan of up to $10 million of Deltic common stock. There is no stated expiration date regarding this authorization.

Item 3. Defaults Upon Senior Securities

None.

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Item 4. Submission of Matters to a Vote of Security Holders

The annual meeting of the stockholders of Deltic Timber Corporation (“Deltic” or “the Company”) was held on April 24, 2007. Pursuant to the Company’s Amended and Restated Certificate of Incorporation, its Board of Directors consists of three classes who hold office for staggered terms of three years. Set forth below is a listing of the directors elected at the April 24, 2007, annual meeting, the results of such election and the names of directors whose term of office continued after the meeting.

Director	Votes for	Votes Withheld
Randolph C. Coley	11,887,867	62,175
R. Hunter Pierson, Jr.	8,455,432	3,494,610
J. Thurston Roach	8,457,776	3,492,266
O. H. Darling Jr.	(Term expires in 2008)
Christoph Keller, III	(Term expires in 2008)
David L. Lemmon	(Term expires in 2008)
R. Madison Murphy	(Term expires in 2008)
Ray C. Dillon	(Term expires in 2009)
Robert C. Nolan	(Term expires in 2009)
Robert B. Tudor, III	(Term expires in 2009)

In addition to the election of three Class II directors at the April 24, 2007 annual meeting, stockholders were requested to ratify the prior appointment of KPMG LLP by the Board’s Audit Committee as Deltic’s independent auditors for 2007. Stockholders ratified the appointment of KPMG LLP by a vote of 11,369,740 shares in favor and 580,302 shares against or withheld.

Item 5. Other Information

None.

Item 6. Exhibits

10.7	Amended and Restated Note Purchase Agreement (incorporated by reference to Exhibit 10.7 to the registrant’s Current Report on Form 8-K dated April 3, 2007).
10.21	First Amendment to Revolving Credit Agreement dated August 7, 2007 (incorporated by reference to Exhibit 10.21 to the registrant’s Current Report on Form 8-K dated August 8, 2007).
31.1	Chief Executive Officer Certification Required by Section 302 of the Sarbanes- Oxley Act of 2002.
31.2	Chief Financial Officer Certification Required by Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification Required by Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DELTIC TIMBER CORPORATION
By:	/s/ Ray C. Dillon	Date: August 7, 2007
	Ray C. Dillon, President and
	Chief Executive Officer
	(Principal Executive Officer)
	/s/ Kenneth D. Mann	Date: August 7, 2007
	Kenneth D. Mann, Vice President,
	Treasurer, and Chief Financial Officer
	(Principal Financial Officer)
	/s/ Byrom L. Walker	Date: August 7, 2007
	Byrom L. Walker, Controller
	(Principal Accounting Officer)

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